Basics of Forex Trading – Part 2 – FX Empire

  • Futures Market: the most popular forex venue prior to the advent of retail forex brokers. Futures contracts are based upon a standard size and settlement dates on the Chicago Mercantile Exchange (CME) in the United States and regulated by the National Futures Association. Smaller exchanges in other countries also offer currency futures contracts. Minimum price increments, delivery, and settlement dates are determined by the contract and the exchange is the counter-party in all cases.

Different Trading Styles

The majority of retail forex traders follow one or more of three main strategies and methodologies:

  • Day trading
  • Scalping
  • Swing (position) trading

Day trading and scalping are two of the most aggressive and active trading styles. In both cases, positions will be closed before the end of the active session. However, these styles differ in trade frequency and holding period.

Scalping techniques take advantage of very small movements, often buying and selling within a few seconds or minutes. Scalpers analyze very short-term charts, looking at 1-minute to 5-minute price action for clues to directional impulses. High transaction costs eat up returns with this high volume trading strategy, requiring a high win-to-loss ratio to book consistent profits.

Day trading techniques focus exposure on 5-minute to hourly charts, looking for directional impulses lasting from one to six hours, as a general rule. Occasionally, day traders will ‘take-home’ a position, holding it overnight while seeking greater profits or an important move at the start of the next session.

Swing trading techniques are longer-term, with positions held for days or weeks. A sizable minority of swing traders also review long-term signals and hold positions for several months.  The chosen method determines which price charts to follow, looking for buying or selling signals on hourly, daily, and even weekly charts.

Forex traders use different types of entry and exit orders, depending on their trading styles. For example, scalpers use market orders more often than swing traders because it lets them enter or exit positions instantly. Limit orders are more useful for day traders and swing traders because positions can be taken at pre-determined prices. In addition, it’s important to use stops on all day and swing trades to limit losses, in case the market decides you’re wrong.

The Importance of the Trend in Forex Trading

Forex traders follow interest rates and the world economy but most rely on technical analysis to evaluate major trends and make trading decisions. This classic approach depends upon three basic assumptions:

  • Prices discount everything
  • History tends to repeat itself
  • Prices move in trends

The majority of newcomers think prices only go up or down but Dow Theory asserts there are actually three trends in the market: up, down, and ‘sideways’ or rangebound. According to Charles Dow’s work more than 100 years ago, investors and traders need to look at the sequence of highs and lows to determine a trend’s long and short-term direction.

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